W.W. Grainger, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter earnings report; the filing’s principal comparisons are FY 2022 versus FY 2021. Grainger distributes maintenance, repair and operating products through High-Touch Solutions N.A. and Endless Assortment, primarily in North America and Japan.
Financial performance
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net sales | $15.228 billion | $13.022 billion | +16.9% |
| Gross profit / margin | $5.849 billion / 38.4% | $4.720 billion / 36.2% | +23.9%; margin +2.2 points |
| Operating earnings / margin | $2.215 billion / 14.5% | $1.547 billion / 11.9% | +43.2% |
| Net earnings attributable to Grainger | $1.547 billion | $1.043 billion | +48.4% |
| Diluted EPS | $30.06 | $19.84 | +51.5% |
| Operating cash flow | $1.333 billion | $937 million | +$396 million |
| Capital expenditures | $256 million | $255 million | Approximately flat |
Higher gross profit reflected growth and margin improvement in both reportable segments. SG&A rose 14.5% to $3.634 billion, primarily from higher marketing, payroll and variable compensation. The effective tax rate was 24.8%, versus 25.0% in 2021.
Segments and material changes
- High-Touch Solutions N.A.: Sales increased 19.6% to $12.182 billion; operating earnings rose 48.7% to $1.983 billion. Daily sales growth reflected price/customer mix of 10.6% and volume/product mix of 8.7%, partly offset by foreign exchange. Gross margin increased 2.3 points to 40.6%.
- Endless Assortment: Sales increased 8.2% to $2.787 billion, including reported sales growth of 20.1% offset by a 12.4% unfavorable foreign-exchange impact, primarily yen translation. Operating earnings declined 3.8% to $223 million as SG&A grew faster than gross profit.
- FY 2022 included a $21 million gain in SG&A from the sale of Cromwell’s U.K. software business. Excluding the gain, adjusted diluted EPS was $29.66, up 49% year over year; adjusted operating earnings were $2.194 billion, up 41.9%. These are company-reported non-GAAP measures.
Cash, debt and liquidity
- Cash and cash equivalents were $325 million at year-end, versus $241 million. Management reported approximately $1.6 billion of available liquidity and believes resources are sufficient for liquidity needs over the next 12 months and beyond.
- Working capital was $2.864 billion, up from $2.455 billion; the current ratio was 2.5, versus 2.7. Receivables and inventory rose, primarily reflecting sales growth and inflation.
- Debt principal obligations totaled $2.374 billion; the balance sheet reported $35 million of current maturities and $2.284 billion of long-term debt. Debt and lease liabilities were 49.9% of total capitalization, down from 56.2%. No borrowings were outstanding under the revolving credit facility, and the company reported compliance with debt covenants.
- Cash used in financing was $972 million, including $603 million of share repurchases and $370 million of dividends. Operating cash flow improved, while receivables and inventory consumed cash.
Outlook, commentary and risks
Management’s stated 2023 priorities include growing MRO market share, expanding online assortment and customer acquisition, improving customer experience and productivity, and investing in technology and supply-chain capacity. The filing does not provide a full-year 2023 revenue or earnings forecast. It expects 2023 capital expenditures of $450–$525 million and share repurchases of $550–$700 million. Grainger expects quarterly dividends to continue, subject to Board discretion.
Management cited inflation in product, labor and transportation costs, rising interest rates, currency movements and recession concerns as continuing uncertainties. It said the company did not currently expect significant overall business disruption from the Russia-Ukraine conflict, while noting its broader economic and supply-chain effects remain uncertain. Key disclosed risks include economic weakness and customer demand, cost inflation and pricing pressure, supply disruption and tariffs, foreign-exchange exposure, competition, cybersecurity and IT interruptions, labor availability, regulatory compliance, climate-related impacts and debt or credit-rating changes.
In litigation related to the 2019 KMCO refinery explosion, Grainger settled claims with 27 plaintiffs; the company said settlement payments were probably covered by insurance and recorded an offsetting liability and recoverable asset, with no FY 2022 earnings impact. The outcome and potential loss for remaining personal-injury claims and related property-damage suits could not be estimated. Management believes resolution of the disclosed proceedings will not materially adversely affect consolidated financial condition or results, but outcomes are uncertain.
The Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax took effect after 2022; management did not anticipate a material financial-statement impact based on its analysis. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. The auditor identified the Canadian reporting unit’s goodwill valuation as a critical audit matter; no impairment was recorded.
Investor verification priorities
- Assess whether High-Touch growth and margin gains are sustainable, and whether Endless Assortment can improve operating earnings as investment spending rises.
- Track working-capital conversion, especially inventory and receivables, alongside operating cash flow and the planned increase in 2023 capital spending.
- Review the assumptions behind 2023 capital-expenditure and repurchase plans, and the effect of buybacks, dividends and the repurchase excise tax on capital allocation.
- Monitor pricing versus product, labor and freight inflation, yen translation effects, and customer demand if economic conditions weaken.
- Follow developments in the KMCO litigation and insurance recoveries, and the Canadian goodwill valuation assumptions highlighted by the auditor.